Mexico’s reliance on U.S. natural gas imports is likely to increase if Claudia Sheinbaum, who is expected to win Mexico's June 2 presidential election, maintains the state-centric approach of outgoing President Andrés Manual López Obrador, aka AMLO, according to analyst Carlos Ramírez Fuentes.
Ramírez, a political and economic risk consultant at Mexico City-based Integralia Consultores, explained why in a report he co-authored for the Woodrow Wilson Center’s Mexico Institute titled, The Mexican Energy Sector after AMLO.
The report discussed the likely scenarios facing the industry after López Obrador leaves office and is succeeded by either Sheinbaum or Xóchitl Gálvez, the two leading candidates.
Like López Obrador, Sheinbaum has stressed the importance of strengthening national oil company Petróleos Mexicanos (Pemex) and state power company Comisión Federal de Electricidad (CFE).
“Sheinbaum has a very clear and firm ideologic vision for the sector. It’s not an open market vision, it’s not one that is pro-market, it’s not one that invites foreign companies to Mexico to invest and compete with Pemex or the CFE,” Ramírez told NGI’s Mexico GPI.
“There will be good investment opportunities for the private sector, I have no doubt about that, but they will always be done under the rules of the state owned energy companies and under the conditions of the regulators that are going to continue to be held captive by the government,” he said.
Since 2019, Ramírez has been with Integralia, which works with clients from the private sector to identify political and social risks in Mexico that can impact financial markets, business opportunities and company operations in the country. Previously, Ramírez was the President of Mexico’s pension regulator, Consar, from 2013-2018. He also has served on the Financial Stability Board of the Mexican Finance Ministry, as a political risk analyst at Eurasia Group and as Chief Communications Officer of Petroleos Mexicanos (Pemex).
Ramírez holds a Master’s degree from Columbia University in Economic Policy Management, as well as a Master’s degree in public policy from the London School of Economic and Political Science (LSE). He holds undergraduate degrees from the Universidad Nacional Autónoma de México (UNAM) and the Institute Tecnológico Autónomo de Mêxico (ITAM).
Editor’s Note: NGI’s Mexico Gas Price Index, a leading tracker of Mexico’s natural gas market reform, offers the following Q&A column as part of a series of periodic interviews with market experts of natural gas in Mexico. Ramírez is the 125th expert to participate in the series.
NGI: What can Mexico’s energy industry expect during the upcoming administration should Claudia Sheinbaum, who is leading in national polls, win the June 2 elections?
Ramírez: The political ideology pendulum for the Mexican energy sector, as we well know, had a very big swing with the 2013 [energy] reform. I mention this to provide some context about how we got to where we are now and what to expect in the future.
For decades, the political ideology of the Mexican energy sector was anchored to the idea of minimal or limited private participation in the industry across all value chains, including areas such as the exploration and production of hydrocarbons, sales of petroleum products, and electricity generation, which of course has been at the center of the sector’s debate during this administration.
The energy sector was closed for decades, and then the 2013 reform changed everything, and the pendulum swung towards an open industry with free market elements such as auctions, bidding rounds, farmouts and an invitation for the private sector to participate directly in the industry. Many of these companies that came and invested in Mexico expected this environment would continue.
And then in 2018, that pendulum swung back to where it was before the reform, and that basically paralyzed some of the things that were introduced in the previous administration, such as bidding rounds, auctions and farmouts. Some of the companies that have remained in Mexico have been able to continue to advance their projects, but during this government, we’ve seen more of an approach that includes picking winners and, overall, the private industry has been much more restricted. Some of the companies that have been favored in this government are some of the bigger companies in the industry, and they have only succeeded under the rules of this administration.
So, the question is, what’s next?
NGI: Right, which is the big question in the industry right now. What can we expect in the next administration?
Ramírez: In general terms, I expect for there to be a return to a more rational approach to the energy market. The government doesn’t have much money to spend and it needs the private sector more than ever to be able to take advantage of the opportunities that Mexico has, particularly nearshoring, and to grow the economy.
Sheinbaum is far more pragmatic than López Obrador. She is someone that has a better understanding of the economic moment that Mexico is currently in and how the world is changing. So, the question for the sector is, how much will she allow for the pendulum to swing back towards the direction of a more open market that is friendlier to private participation?
NGI: So far the impression seems to be that she will be more open to private participation in renewable energy generation, while continuing to support the monopolies of Pemex and CFE. Is that how you see it?
Ramírez: What I would say is that, whatever decision that Sheinbaum makes in the energy sector carries with it challenges and political costs. For example, if Sheinbaum wanted to reopen the sector to private participation, she would assuredly clash with the ideological vision of López Obrador and those that are in power currently. Additionally, if she were to reopen the sector, it would, in fact, clash with her own ideology, which is very attached to the idea of a nationalistic energy model that promotes energy sovereignty at all costs and, above all, seeks to strengthen the state energy companies.
In that sense I see that Sheinbaum is trapped. If she, in fact, wanted to bring back more private investment, she would be limited by the ideology that governs the energy industry currently, which is also her own ideology and vision for how the sector should operate. I don’t think that Sheinbaum wants to break from the López Obrador model under any circumstance. It’s not in her interest or beliefs, and isn’t something she wants or has any intention of doing.
So when I hear a lot of optimism that Sheinbaum might reopen the industry some and be friendlier with private investment, I agree that could be a possibility, but I think it will certainly have limitations. Opening the industry will clash very quickly with the political ideology that rules the industry currently.
NGI: How do you think continuing with the López Obrador ideology will impact the Mexican natural gas market?
Ramírez: I think natural gas is the best example to demonstrate how Sheinbaum’s energy policies might work. Mexico needs to produce more natural gas, particularly to reach energy sovereignty goals.
Recently, we did an extensive report for a client in which we reviewed everything that Sheinbaum has ever said, done, written or published about the energy sector. We collected all of that information with the goal of constructing an image or a profile of Sheinbaum’s true vision for the energy sector. And, the conclusion that we arrived at is that Sheinbaum has a very clear and firm ideologic vision for the sector. It’s not an open market vision, it’s not one that is pro-market, it’s not one that invites foreign companies to Mexico to invest and compete with Pemex or the CFE. That’s not the model she envisions.
Sheinbaum’s ideology is a model of Pemex and CFE first, at all costs. It’s one that wants to reduce the dependency on the U.S. in terms of energy consumption, such as imports of petroleum products and natural gas. And, while her ideology also says that Mexico wants more private investment, it’s only allowed where we assign it, and under the terms and conditions that we decide.
And it’s there where the problems begin and where, personally, I am skeptical about what Sheinbaum says and what she’s actually willing to do, in natural gas specifically.
NGI: Mexico has never imported more natural gas from the U.S. than it does now and hasn’t prioritized national production in the past. Do you think Sheinbaum might attempt to increase Mexican natural gas production as part of her energy sovereignty goals?
Ramírez: If Mexico really wants to reduce its dependency on the U.S. for natural gas, it would have to reopen the bidding rounds and open auctions, and return to offer farmouts.
It’s the same situation for the electricity sector as well. Sheinbaum talks a lot about renewable energy. Ok, great, but are you going to open the door to private participation if it means the CFE will reduce its role as the dominant provider? Is the Energy Regulatory Commission (CRE) going to return to issuing permits instead of blocking them, which they did throughout this administration, so that private players can inject power into the grid? I doubt it. From a political risk point of view, I see enormous contradictions between what she truly thinks and what she can truly accomplish – politically speaking – and is willing to do.
In conclusion, I think the ideological pendulum that I referred to will swing a little bit back towards the center. There will be good investment opportunities for the private sector, I have no doubt about that, but they will always be done under the rules of the state owned energy companies and under the conditions of the regulators that are going to continue to be held captive by the government. The investment opportunities won’t be in the form of an open market similar to what the 2013 energy reform offered.
That’s how I see it. I see an energy sector with restrictions and limitations and a government that wants to direct where and how private sector investments can be incorporated. I think there will be companies in the private sector that accept these rules and will be willing to enter the country and operate under them. There will be others that won’t want to participate under the government’s conditions because they don’t provide enough long-term certainty and don’t promote an open competitive market in the long term.
So, I think we’ll have an administration that is a little more open with the energy sector if Sheinbaum wins, but I’m hearing a lot of optimism and I think people are overlooking the political angle. The political angle in all of this is key. If you remember in 2018, there were a lot of business groups that heard what they wanted prior to the López Obrador administration and thought he might be market friendly. They underestimated what he might do to the energy industry and business environment. I think that’s important to consider ahead of a possible Sheinbaum presidency, because we could find ourselves back in a similar situation.
